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Tax Questions Loom as the 2024 Election Draws Near

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Jeremy Milleson

Director, Investment Strategy

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The tax landscape could change as the election grows near, but how? We dive into a handful of proposals from the Democratic and Republican sides of the House to see which might impact investors. 

It’s hard to believe that we’ve already reached the midpoint of 2023. The tax outlook for the rest of the year will transform based on the changes President Joe Biden might try to enact throughout the rest of his term. With the 2024 election cycle around the corner, the field of opposing presidential candidates has begun to fill up. Florida governor Ron DeSantis and former president Donald Trump lead an expanding field of Republican candidates, including former vice president Mike Pence and former UN ambassador Nikki Haley, among others.

What might the victorious candidate’s tax agenda be? We’ll explore some of the policies in the Tax Cuts and Jobs Act (TCJA), as well as details around its expiration. We’ll also focus on a handful of Biden’s proposals that might have the greatest impact on individual investments and highlight what investors may choose to do based on these changes. 

Has the TCJA come to stay?

Trump signed the TCJA into law on December 22, 2017. The bill represented sweeping changes in taxation, including reducing the corporate tax rate from 35% to 21%, lowering individual income tax rates, and decreasing taxes on inherited wealth. The TCJA made most of the corporate tax changes permanent, while most of the personal income tax changes were temporary and set to sunset at the end of 2025. This would mean the top marginal tax rate would revert to 39.6% from its current 37%. 

The TCJA also doubled the exemption to the amount of wealth that can be passed tax-free to heirs from $11 million in 2017 to $25.8 million, where it currently sits. The exemption is indexed to inflation and set to expire as well. Many Republican House members and presidential candidates have already called, or are likely to push, for the expiring tax changes to be made permanent.

Will Biden tax proposals impact investment portfolios?

The Biden administration recently introduced a budget that’s very unlikely to be enacted as it stands, given the Republican-controlled House and the proximity to the election. However, the proposed budget changes are useful in understanding what Biden is likely to push as he begins the reelection process. While the budget includes several corporate tax changes, such as increasing the corporate tax rate to 28%, we’ll focus on some of the proposed changes that may more directly impact personal wealth. 

The budget increases the top income tax rate to 39.6% and lowers the top-bracket breakpoint to more than $400,000 for individual earners and $450,000 for joint filers. The budget calls for taxing long-term capital gains (LTCG) and qualified income at the ordinary income tax rate for individuals or households above $1 million. In addition, the budget would make changes to the step-up in basis at death, taxing unrealized capital gains at death above $5 million for individuals or $10 million for joint filers. On top of all the changes in the budget, Democrats would also likely allow the rest of the TCJA changes to expire at the end of 2025.

Consider the benefits of active tax management

Highest federal marginal income tax rate, 1913-2023

 Highest federal marginal income tax rate, 1913–2023

Source: IRS, 2023. For illustrative purposes only.

Current Law and Biden budget

Source: IRS, 2023. For illustrative purposes only.

For each of the three tax changes above, the tax management of investment portfolios could be impacted. The rise in the top tax rate increases the value of realized losses since each dollar in short-term losses offsets a dollar in short-term gains. This means roughly 7% more taxes would need to be paid. Taxing LTCG at the ordinary income rate for high earners would both increase the value of losses and make gain deferral more important. Under these guidelines, taxpayers may also seek to strategically realize LTCG at the lower rate in years when their income is below $1 million. The changes to the step-up in basis would reduce one of the current benefits of deferring gains until assets receive a step-up basis at death. This may alter investor strategies to reduce tax bills by as much as possible now, rather than defer.   

The bottom line

In many ways, the current period feels like the calm before the storm for tax policy. With a divided Congress and an election in the not-so-distant future, substantial tax changes over the rest of the year seem unlikely. However, with the campaigns just starting to ramp up and the expiration of the TCJA looming, the topic of tax policy will begin to heat up soon. As always, we continue to monitor how these changes may impact our clients and stand ready to help investors make sense of it all.

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